Know the Law: Raising capital to grow your business

Q: I am the owner of a small New Hampshire business and need additional capital to expand my growing business. Taking on additional debt is not possible, so I must raise more equity capital. What do I need to know?

A: If you are raising equity capital from outside investors, you are selling securities. When selling securities, you have two general obligations under the law. The first is to register your securities offering (unless you can find an exemption from registration), and the second is to disclose all material information about your company to prospective investors.

Registration of an offering is not a realistic option for a small businesses. Fortunately, both state and federal laws provide multiple “safe harbors” from registration. At the federal level, the most common safe harbors are found under Regulation D of the Securities Act of 1933. The details for each safe harbor are beyond the scope of this article, and you should consult an attorney before claiming any particular safe harbor. In general, these safe harbors allow for the sale of securities to a limited number of investors and/or investors that meet certain net worth and sophistication standards (known as “accredited investors”). The most commonly used exemptions in New Hampshire include the limited offering exemption, which limits the number of sales of the company’s securities to no more than 10 persons in any 12-month period, with a lifetime cap of 25 holders. Depending on your situation, this may or may not be your best option. You are well advised to seek the help of an experienced securities attorney to help navigate the provisions of the exemption that best fits your needs.

Even if you are able to fit your offering within exemptions from state and federal securities laws, you must still disclose all material information about your company and its business.

This standard is often difficult to apply, and so the safest route is to disclose everything.

Remember, selling securities is not a poker game. When in doubt, show all of the cards, good and bad. Consult a lawyer with securities experience to guide you through the disclosure process.

If you violate the securities laws, both your company and you as an officer, director and principal may be liable, both to investors and for civil (and possibly, criminal) penalties and sanctions. Therefore, you must proceed with caution.

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Michael Tule can be reached at michael.tule@mclane.com.

Know the Law is a bi-weekly column sponsored by The McLane Law Firm.

We invite your questions of business law. Questions and ideas for future columns should be addressed to: Know the Law, The McLane Law Firm, P.O. Box 888, Manchester, NH 03101 or emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.